The G20, the World Bank’s “Cascade”, and Trump: Going to any Length to “Crowd In” the Private Sector?

For several years, there have been efforts to shift the mission of the World Bank and other multilateral development banks (MDBs) to one of “crowding in” private investment. Especially since the early 2000s, World Bank critics (including Trump’s current nominees for senior U.S. Treasury jobs, e.g., Adam Lerrick) blamed the institution for “crowding out” private investors by making loans to creditworthy countries, such as China, and by extending loans for projects that should have been commercially financed.

Some ways to “crowd in” private finance were described in a paper prepared for the 2015 UN Financing for Development (FfD) Conference. In the paper, entitled “From Billions to Trillions,” the IMF and six multilateral development banks (MDBs), including the World Bank, set forth grand ambitions to crowd in private investment. Just recently, reports cite Kim as echoing that theme, saying, “official aid money should be used to turn the billions of dollars provided by western countries into trillions of dollars of investment from the private sector.”

They call upon governments to attract investors by means of “de-risking” countries, sectors and projects in order to attract investors, especially long-term institutional investors which possess about $106 trillion in savings.

But, “de-risking” is a misleading word because risk cannot just disappear; someone has to bear it. It is more accurate to say that risks are being transferred from private firms to governments, taxpayers, and consumers. This can be achieved through government adoption of business-friendly laws, policies and regulations and the use of various products that shift risk and cost to governments and citizens, including user fees, fiscal subsidies, guarantees, insurance, and blends of public and private finance.

The above-mentioned “Principles” build upon the 2016 Chinese G20 “Enhanced Structural Reform Agenda” which, among other things, calls for “improving infrastructure,” including by promoting private sector participation through the use of Public-Private Partnerships (PPPs).

Before the Trump administration took power, World Bank President Jim Kim hoped that – in addition to crowding in private investment, the institution would expand its lending operations by means of a General Capital Increase. But, according to some reports, the new administration has poured cold water not only over those hopes. Apparently, the U.S. does not support a capital increase and, in fact, would trim some financial support for the World Bank. Thus, the World Bank is left with the option of shrinking its operations and changing its role to that of “strategic advisor” or “honest broker.” Kim says that this would require no less than a “require a change in [the World Bank’s] identity.”

He elaborated, saying:
“We [also] have to change how we see ourselves. Right now we see ourselves as a lender … as an investor … directly financing projects and working towards specific policy goals … but we have to change and think of ourselves now as strategic advisors, honest brokers who link capital looking for a greater return to countries looking to achieve their higher aspirations.”
In their name, the G20 “Principles of MDBs’ strategy for crowding-in Private Sector Finance for growth and sustainable development” aspire to achieve sustainable development, but this is not true of the World Bank’s cascade approach to financing. See below.

Figure: The World Bank’s Cascade Approach

The cascade approach would only resort to public finance (in step 4, above) if all attempts to employ commercial financing have failed without determining whether such financing would adequately serve the public interest, including sustainable development goals, including social, environmental and human rights goals. Moreover, if commercial financing would undermine sustainable development, the cascade approach contains no steps to prevent that.

The cascade approach assumes that there will never be trade-offs between commercial goals and the public interest when de-risking reaches a point at which regulatory and policy reforms (step 2, above) or risk mitigation (step 3, above) become too costly, or too risky for stakeholders other than the private investor. For instance, construction of a coal plant may not be too costly, but it may be too risky in terms of its emissions of greenhouse gases or its health impacts.
In Kim’s speech in April, he says “One of the things we’d like to do, for example, is to find a way for a pension fund in the United Kingdom to be able to invest in building roads in Dar es Salaam, get a reasonable return on that investment, and do a lot of good in the process.” However, there is a point at which tolls become prohibitive for low-income persons and aging pensioners should not be benefiting from them, especially pensioners outside Tanzania.